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Good faith and mutual trust and co-operation in construction contracts

Good faith and mutual trust and co-operation in construction contracts

16.06.2015
United Kingdom

Two High Court cases, in which judgments were given last month, have considered the potential for good faith and mutual trust and co-operation type obligations to apply in a construction context. These cases provide further examples of the court refusing to imply such obligations and confirm that express clauses along these lines, such as the NEC’s mutual trust and co-operation clause, are unlikely to fetter the exercise of rights arising under other express provisions of the contract.

Mears v Shoreline Housing Partnership

Mears, the contractor, and Shoreline, the employer, entered into a repair and maintenance term contract which was signed some six months after work had started and applied retrospectively. The contract was based on the NEC3 Term Services Contract conditions incorporating Option C and included the NEC standard clause 10.1 which requires the parties “shall act as stated in this contract and in a spirit of mutual trust and cooperation”.

The parties fell out over the basis of pricing for the works, with Mears arguing that the parties had agreed to proceed on a basis different to that set out in the signed contract. The case mainly deals with arguments based on estoppel. However, Mears also tried to rely on a separate cause of action based on clause 10.1 and argued for an implied term that neither party would “take advantage against the other of the departure by the other from the strict requirements of the contract where the first mentioned party was or ought to have been aware of the departure without warning the other party and affording an opportunity and a reasonable time to the other party to change"

The court rejected both the implied term and the potential for clause 10.1 to apply in such a situation. Mr Justice Akenhead said that he was “not satisfied that there would be any such implied term or that the obligation to act in a spirit of mutual trust and cooperation or even in a “partnering way” would prevent either party from relying on any express terms of the contract freely entered into by each party”.

Having said that, the judge found that on the facts there was an estoppel (both by convention and by representation) such that Shoreline was effectively committed to paying Mears on the basis originally agreed between them. This is a good illustration of the point that there are often other legal principles that will come to the aid of a party who feels that the other has failed to act in good faith.

Chelsfield Advisers v Qatari Diar Real Estate Investment Co

Qatari Diar and Chelsfield entered into a Development Fee Agreement (DFA) related to the proposed redevelopment of the site of the US Embassy in Grosvenor Square. The DFA made provision for the parties to enter into a Development Management Agreement (DMA) for the provision of development management services at the site. The DFA also allowed for termination in the event Chelsfield becomes insolvent.

In September 2013, Qatari Diar provided Chelsfield with a draft DMA which differed in a number of respects from the form of DMA discussed previously between the parties and said that if the terms could not be agreed the matter would need to be referred to expert determination as provided for by the DFA. Certain issues were subsequently referred to an expert in 2014 and Chelsfield also started separate proceedings under the DFA. However, and without any warning, in September 2014 Qatari Diar wrote to Chelsfield and said that it had lost trust and confidence in their ability to deliver under the DFA and DMA and that accordingly it was treating the DFA as at an end.

Chelsfield made an application for summary judgment seeking inter alia a declaration that the DFA had not been validly terminated. A breakdown in the parties’ relationship or a loss of mutual trust and confidence was not a specified ground of termination in the DFA. The main issue before the court was, therefore, whether on proper construction of the DFA and/or by way of term to be implied into the DFA, that the continuation of the DFA must have been intended to be conditional upon the continued existence of “a relationship of trust and confidence” and upon breakdown of that relationship, the DFA must have been intended to be terminable upon either party’s request.

The court concluded that there was no real prospect of Qatari Diar establishing that the DFA should be construed in the nature contended for or was subject to the implied term and decided that the DFA remained in existence. In doing so, the court drew support from the recent Court of Appeal decision in Mid Essex Hospital Services NHS Trust v Compass Group and noted that the general rule for implying obligations of good faith into commercial contracts was that, “if the parties wish to impose such a duty they must do so expressly”. On that basis, the court considered the case “stronger still for saying that if the parties wish to produce the result that each of them has the right to terminate the contract in the event that it loses trust and confidence in the other, even when the other party is not in breach of contract and if that may be unreasonable, then they should do expressly”.

Conclusion and implications

These two cases would appear to represent a robust application of the Court of Appeal’s decision in Compass, both in confirming judicial reluctance to imply terms into commercial contracts as to good faith and mutual trust and co-operation and also with regard to the proper approach to interpreting express terms covering such ground.

The court’s findings in relation to clause 10.1 of the standard NEC terms is likely to stoke further debate as to the effectiveness of such clauses in attempting to impose an overriding duty of good faith or mutual trust and co-operation such as is seen in civil law systems. In deciding that clause 10.1 could not prevent reliance on other express terms, the decision appears to confirm guidance from the Court of Appeal in Compass that “care must be taken not to construe a general and potentially open-ended obligation such as an obligation to "co-operate" or "to act in good faith" as covering the same ground as other, more specific, provisions”.

It is also notable that there is no mention in these two recent cases of the first instance decision in Yam Seng PTE v International Trade Corporation where the court implied various good faith obligations into a distribution agreement. That case represents something of a high water mark for the implication of good faith obligations under English law in it the judge had remarked that, by refusing to recognise a duty of good faith, the English courts were swimming against the tide. So far at least, the Compass decision appears to have halted any movement in this direction.

These cases suggest there is little appetite in the English courts to imply general obligations of good faith or to say that the application of specific provisions will be fettered by general requirements to act in good faith. Given this, is it now time to dispense with these general requirements on the basis they provide no more than window dressing?

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